Why Australia Prospered: The Shifting Sources of Economic Growth

January 24, 2013

The success of the Australian economy - its last official recession ended in 1991 and it has enjoyed more than 20 years of almost uninterrupted growth, slowing only recently - is impressive in comparison with sluggishness elsewhere. Apart from prolonged stagnation from 1890 to 1940, there were long periods of prosperity during the three “long booms” from 1851 to 1890, 1940 to 1973 and 1991 until today - usually but not always mirroring international stability. In Why Australia Prospered, Ian McLean explores the fascinating mix of factors explaining this persistence of prosperity.

When the First Fleet sailed into Botany Bay in 1788 it carried a mix of convicts, settlers and military personnel. In the early years of colonial rule, Australia’s comparative advantage lay in the pastoral economy and grew “on the sheep’s back”. While subsequent generations might have felt uneasy about the “convict stain” on Australia’s name, the transportation of convicts was integral to the nation’s success. Masculinity rates were high and dependency rates were low. The pastoral economy was able to draw on relatively cheap convict labour. Either by luck or good design, institutions adapted flexibly to circumstances. The diversification of the bases of comparative advantage, from wool to gold to wheat to sugar and then into manufacturing, ensured that the economy did not suffer significantly from the resource curses that can plague economies endowed with abundant natural resources. Its economic alliance with Britain gave specific advantages, the colonial institutions prevented unequal distributions of land, and farmers squatting on Crown land were not given automatic freeholder rights to land when land was distributed, and this limited their political power. The bulk of Australia’s trade was with Britain when it was the global technological leader. Australia also benefited from British subsidies and from access to London capital markets.

This golden history was disrupted from 1890 until around 1940 with droughts and global recession. In the interwar period, protectionism encouraged manufacturing inefficiency and Australia’s lagging trade position mirrored both lapses in British fortune and the strengthening of Britain’s European ties. But Australia adapted to these changes and developed successful and complementary trading links in the post-war period - initially with Japan and then with other parts of Asia, most importantly China.

The overall theme is that while Australia is the Lucky Country, it is not just a gift of nature; luck interacted with well-designed, flexible institutions and policies. Australian institutional frameworks did not impede profit-making and risk-taking, and no one group had access to excessive economic or political power. Social cohesion fostered egalitarian temperaments. The “tyranny of distance” was overcome by the characteristics of Australia’s exports: wool has a low bulk-to-weight ratio and gold has a low bulk-to-value ratio, so their transport costs were relatively low. Distance was not so tyrannical after all; Australia was able to develop strong trading links with the UK economy some 10,000 miles away.

As in any resource-rich economy, there are significant tensions between exploiting comparative advantage and minimising vulnerability to external shocks. Australian prosperity is explained by the flexibility in responses to interactions between these factors and the shifting bases of prosperity. McLean places a strong emphasis on counterfactuals. What would have happened if the squatter farmers had been given freehold rights early on? Or if North Queensland had seceded to build a plantation-style sugar economy on the back of Melanesian indentured labour? He contrasts historical performance with a range of other former colonies; in particular, with the more uneven rate of development in Argentina, a country characterised by less egalitarian institutions.

This is a carefully researched book but very much an economist’s account. There is no mention of the colourful personalities peppering Australian history. The focus is on the facts and figures and the economic drivers. The problem is that a reader who knows little about Australian history would not realise from this account some real stains on the nation’s history, including the racist “White Australia” immigration policies of the interwar years and the brutal treatment of the Aborigines, including the annihilation of some groups during the early years of colonial rule. Australia was a lucky country for European free-settlers; it probably is for most immigrants today, too. However, it is definitely not a lucky country for its first inhabitants; it is a dual economy in which most Aborigines live in Third World conditions. More could have been made of these points.

Why Australia Prospered: The Shifting Sources of Economic Growth

By Ian W. McLean

Princeton University Press, 304pp, £24.95

ISBN 9780691154671

Published 13 December 2012

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